As a Freelancer, How Do I Budget?

by Loella Haskew, CPA

How do you save and budget when your income is based on freelancing? Some months you work, and some you don't.

Every freelancer has had to figure out how to budget without the steady consistency of a paycheck. There is no magic formula for smoothing the cash flow to ensure that you will have enough money left over from the up times to cover expenses during the down times.

One way that works for some people, however, is to budget on an annual basis rather than weekly or monthly. An annual budget reminds you that you have certain expenses that you must meet over the long haul. When you get a windfall of funds, you are less likely to spend the cash foolishly if you see you have three months of rent or house payments to make and you can’t be sure of receiving future payments to cover those costs. Furthermore, you should have a reserve fund of at least three to six months of ready cash that can cover regularly anticipated expenses, including insurance and utility bills. That takes some of the pressure off of you when you have some lean income months.

Because you work for yourself, you should also put aside about 50 percent of your net income to deal with taxes. You’ll need that amount to cover self-employment tax in addition to regular income taxes. You should be making quarterly payments to both the federal government and to your state government if you live in a state like California that has income taxes. Depending on where you live, some cities also tax income.

And don’t forget to budget for your retirement. Many people think Social Security checks will be enough to live on during their retirement years, but Social Security likely will only cover about 40 percent or less of your expenses at that time. Depending on your circumstances, you should regularly put money into an Individual Retirement Account (IRA) or a Simplified Employee Pension (SEP) plan. The earlier you start doing so, the greater the likelihood you’ll have enough money to live on once you retire.

Budgeting for a freelancer can be difficult, but if you think long-term, make regular contributions to a reserve fund and to a retirement plan, and keep careful control over your expenses, you should be able to manage. You might also consider consulting a financial planner such as a CPA. He or she can find savings you may not have thought of, make sure you are claiming all tax credits and deductions you are entitled to, and help you set up a good retirement program.

Loella Haskew is a Walnut Creek, Calif., CPA with the firm of Buckley Patchen Riemann & Hall. You can reach her at (925) 937-2727.

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